Ben Everard: Regulation milks dairy farmers' profits

Milk. They say it does a body good. These days, production of the ubiquitous staple is bad business in the state – and the reason is partly the result of Sacramento's regulatory structure.

For historical reasons related largely to ensuring that the nation has a steady supply of the highly perishable commodity, the price of milk is highly regulated at either the federal or state level. Each month, the federal government uses a complex formula to establish a minimum price that processors must pay to dairy farmers for milk.

The Federal Milk Marketing Order regulates most states. California has its own pricing formula. .Due to regulations that govern California's formula, the payout to the state's milk producers varies drastically. State dairy farmers receive a significantly lower milk price at a time when feed prices (food for the cows themselves) remain at record highs. The result? The profit margin on milk production has evaporated, and California dairy production is taking a massive hit, with losses mounting and dairy production down by nearly 4 percent year over year.

To summarize a complex regulatory system simply, milk is divided into categories called "classes." Fluid milk is a separate class from yogurt, which is a separate class from cheese or butter. For each class, milk components are valued depending on how they are used, and those component values determine the minimum price for milk producers.

The unusual aspect of California's regulatory order relates to the cheese classification. The Sacramento Department of Food & Agriculture gives a different value to whey – the liquid byproduct of cheese production – when compared to the Federal Order.

When fluid milk is placed into a vat to produce cheese, the milk eventually coagulates and cheese curds are formed. The remaining yellowish liquid is called whey.

Historically, this byproduct has not had many uses, and thus, its value in an unprocessed form was minimal. In recent years, however, China has been purchasing dried whey for animal feed, and the price has skyrocketed.

Both the federal and state governments take the price of whey into consideration in their formulae. The federal government uses a national survey to calculate a weighted average of the market price of dry whey for a given month, the value of which is reflected in its formula.

When the price of whey goes up, the milk price goes up accordingly. California, however, uses a different approach. The market price for dry whey uses a sliding scale that adjusts the contribution of whey as the market price moves up or down.

However, the sliding scale has a hard cap on the value of the price of whey – that is, the state's formula does not value whey at more than 75 cents per one hundred pounds of milk. In years past, the price of whey had been minimal, so there was not a significant difference between the federal and state formulae.

However, whey's value has increased considerably in the last few years, and the price is well north of the California cap. With dry whey prices skyrocketing, the difference between the minimum milk price for California milk producers and producers using the federal Order is around $2 per hundredweight. The California regulatory system significantly undervalues whey at the expense of its own dairy farmers.

How does this price difference impact the dairy farmer? Milk producers in states such as Wisconsin receive approximately $2 per hundredweight more than their California counterparts for milk used in cheese production. For a large farm operating with 5,000 cows producing close to 100,000 hundredweights per month, the price difference is significant.

This price gap can be the difference between operating a dairy farm at a profit or a loss. So why don't California dairy farmers simply ship their product to Wisconsin? The transportation costs associated with shipping the highly perishable product out of state are too costly to make up the difference. Given the nature of the product, California dairy farmers, by default, sell their milk to California processors; and due to the value of whey in the state's formula, the price they receive is below the Federal Order.

The Department of Food and Agriculture in Sacramento is the entity tasked with regulating the minimum price of milk in the state. They alone have the authority to change the formula to reflect today's realities. Although concerns have been raised, little has been done.

Unfortunately, the state's dairy farmers are the ones paying the price. Until the Department of Food and Agriculture modifies the formula to reflect the market realities, California's milk producers will continue to remain at a competitive disadvantage.

Farmers have it tough dealing with Mother Nature daily. They should not have to worry about bureaucrats in Sacramento, too.

Ben Everard is an attorney and producer based in Los Angeles.

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